Neoclassical Growth Theory Chapter 13

2 ©1999 South-Western College Publishing Figure 13.1 Inputs and Outputs in the United States, 1929 – 1995 Thousands of 1987 dollars Input per person of normalized units Production function in 1990 Production function in

3 ©1999 South-Western College Publishing Figure 13.2 Percentage of income Labor’s Share of National Income ’55’60’65’70’75’80’85’901930’50’45’35’ % = 2/3 Labor income as a percentage of national income

4 ©1999 South-Western College Publishing Figure 13.3 Output per unit of input Solow residual The Solow Residual in the United States

5 ©1999 South-Western College Publishing Figure 13.4 The Sources of Growth in GDP per Person 0.92% 0.55% 0.17% 1/3 growth in capital per person 2/3 growth in employment per person Growth in productivity (the Solow residual)

6 ©1999 South-Western College Publishing Figure 13.5A Three Facts Used to Construct the Neoclassical Growth Model Real per capita GDP, in thousands of 1987 dollars $ Panel A Per capita GDP grew by 1.64% per year

7 ©1999 South-Western College Publishing Figure 13.5B Government plus private consumption as a percentage of GDP ’55’60’65’70’75’80’85’901930’50’45’35’ Three Facts Used to Construct the Neoclassical Growth Model Panel B Consumption averaged 80% of GDP; saving averaged 20%.

8 ©1999 South-Western College Publishing Figure 13.5C Compensation to employees as a percentage of income ’55’60’65’70’75’80’85’901930’50’45’35’ Three Facts Used to Construct the Neoclassical Growth Model Panel C Labor’s share of income was equal to 66%.

9 ©1999 South-Western College Publishing Figure 13.6 y (Output per person) k (Capital per person) The Per Capita Production Function y = Ak 1/3

10 ©1999 South-Western College Publishing Figure 13.7 Convergence When the Economy Begins with Too Little Capital 45° k ktkt k3k3 k2k2 k1k1 k t + 1 Paths that begin below the steady state converge toward it over time from below. The neoclassical growth equation has a positive stable steady state. k t + 1 = k t t 1/3 k t + 1 = (1 -  ) k t + s Ak

11 ©1999 South-Western College Publishing Figure 13.8 k ktkt k3k3 k2k2 k1k1 k t ° Convergence When the Economy Begins with Too Much Capital k t + 1 = k t Paths that begin above the steady state converge toward it over time from above. Zero is also a steady state of the model, but it is unstable. 1/3 t k t + 1 = (1 -  ) k t + s Ak

12 ©1999 South-Western College Publishing Table 13.1 The Labels Used to Measure Growth Rates VariableFormulaDefinition KtKt QtNtQtNt YtYt QtNtQtNt Q t + 1 QtQt N t + 1 NtNt Q t + 1 QtQt N t + 1 NtNt E t + 1 EtEt Capital per efficiency unit of labor Output per efficiency unit of labor g Q is the growth rate of labor efficiency g N is the growth rate of population g E is the growth rate of labor measured in efficiency units ktkt ytyt (1 + g Q ) (1 + g N ) (1 + g E ) The Labels Used to Measure Growth Rates =

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